Alternative to GIPS for Investment Performance Credibility

Many investment advisors follow the Global Investment Performance Standards (GIPS) to bolster the credibility of their performance results.  However, not all firms are able to claim compliance with GIPS.  A non-GIPS examination report can add credibility to a firm’s performance results without the firm having to apply the GIPS standards to all of its assets under management.

Recognized as a voluntary global standard for calculating and presenting investment performance, GIPS are ethical principles that promote fair representation and full disclosure of investment performance. A firm complying with GIPS must apply the standards to all discretionary assets it manages. A firm can claim compliance with GIPS only after all of the required elements are met, including a presentation of at least five years of performance history (or since inception if the product is not at least 5 years old) for every composite. A firm’s GIPS compliance also can be audited by way of verification or a performance examination.

While the ability to demonstrate GIPS compliance can be advantageous for a firm, getting there can be difficult. What if a firm can bring only a portion of its products (i.e., one or two composites) into GIPS compliance? What if a firm is unable to get prior years into compliance?

Further complicating matters, many investment advisors manage assets for both institutional and individual clients. While implementing GIPS is typically more straightforward for institutional clients, it can be more challenging for individual investors. These personal portfolios often are highly customized to meet the investors’ individual needs. This can cause challenges in grouping accounts into similar composites, which is a fundamental GIPS requirement.  In some cases, the use of sub-advisors or outside sponsor platforms can cause additional record-keeping and calculation concerns.  While individual investor clients generally don’t inquire about GIPS compliance, in many cases, institutional investors require some type of assurance that the investment advisor’s investment performance is accurate.

So how can firms demonstrate credibility for their performance numbers when GIPS compliance isn’t an option? One way to solve this dilemma is to engage a CPA firm to perform a non-GIPS examination of the investment returns. In a GIPS verification or performance examination, the verifier’s report references the GIPS standards so the reader understands how the presentation works. However, it is possible to remove GIPS-specific references from the performance presentation and add disclosures that further explain the details of calculations and policies. Such a report would be similar to a GIPS compliant performance presentation.

A CPA firm can examine this non-GIPS presentation. The CPA’s opinion would indicate that they examined whether the performance was presented in accordance with the calculation methodology described in the notes to the performance presentation.

Investment advisors then can provide the CPA’s report to their investors and prospects to demonstrate the accuracy of the firm’s performance reporting, making the non-GIPS examination a great alternative for firms for which it is not practical or feasible to seek firm-wide GIPS compliance.

Thomas A. Peters, Director, Audit & Accounting can be reached at tpeters@kmco.com or 215.441.4600.

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